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The Politicians Were Right! Small Companies, Not Big Companies, Create Jobs

With the midterm elections looming, job creation, over-regulation, and big government will again be election issues. Is the government doing too much or too little to support business? Do we need more tax benefits focused on large companies? Should we take away tax benefits to corporations? Who really drives the U.S. economy? Let’s look at the facts.

A recently published study has provided another piece of evidence that the middle market, and not large companies, is driving the growth of U.S. economy. According to the National Center for the Middle Market (NCMM), the U.S. middle market saw a 5% increase in revenue growth in the fourth quarter of 2013. This compares to the 1% revenue increase achieved by S&P companies last year.

According to this study, “The first quarter of 2014 marked a resurgence in growth for the U.S. middle market. Middle market companies reported a year-over-year increase in revenue growth for the past 12 months and added workers to the payroll. Looking forward, middle market companies project revenue at a slower pace but expect employment to improve significantly.”

This study is an important indicator that the mid-market continues to expand its role as a key engine of our country’s economic strength. The trend seems set to continue.

What is behind the growth of the middle market? Companies, especially big ones, that are looking to target the sectors and companies that can drive their next phase of growth need to understand what makes the middle market tick. But several other factors are in play:

Speed – Middle market companies, broadly defined as those whose revenues range from $10 million to $1 billion, tend to be more agile than larger firms. A basic fact about today’s business environment, whether global or local, is its extraordinary fluidity. The scope and pace of change are increasing constantly. Opportunities open and close swiftly. A host of trends — disruptive changes in markets and products; volatile shifts in demand; globalization, capital flows across borders, the reach of technology, and radically new business models that leverage technology — reward speed, adaptability, and decisiveness. Middle market companies’ smaller size and concentrated ownership means they can change direction faster, adapt more aggressively, and innovate more nimbly

Technology – Powerful tools and methods that have become available to smaller companies are driving growth in the middle market. With the cloud they can access specialized software tools as a service, customized to their needs, without incurring upfront capital costs. A wide range of alternatives to outsource all but a company’s most core, strategic activities enables them to do more on a smaller capital base — and to make expenses more variable, lowering their break-even point. Ingenious online commerce and social media marketing enable upstarts to disrupt incumbents. Global expansion can occur earlier in a company’s life cycle than ever before.

Money – Extraordinary amounts of capital are available to middle market companies that can grow profitably. One key source of capital: middle market private equity firms have a tremendous amount of “dry powder,” investment capital they are ready to use to acquire promising companies. Entrepreneurs who can get their company close to scale, producing net cash flow of as little as $1 million a year, have many options to get financing to fund their growth.

Regulations - Most middle market companies are private, and therefore not constrained as public companies are by a straitjacket of analyst expectations about their next quarter’s earnings. Middle market companies are unburdened by the bureaucracy that slows down decision making in larger companies.

At its best, the middle market is the realm of ambitious, determined entrepreneurs who have the drive to innovate. The middle market is also the territory of solid family businesses, such as manufacturers that have improved their craft over successive generations. These family firms build on a legacy of goodwill in their markets and communities.

The leaders of middle market firms bring energy, inventiveness, and an intimate knowledge of markets and customers. For these reasons, growth of the middle market sector is expected to exceed that of the economy through the balance of this year — and beyond. Companies of all sizes need to understand the opportunity to target and sell to these companies. Let this vital segment of the economy help to power your success.

Michael Evans and Mark Rosenman of Newport Board Group contributed to this article.

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